FOMC policymakers on the more hawkish end of the spectrum viewed the full employment part of the dual mandate as already attained and foresaw the achievement of two percent inflation soon. As such, they continued to expect further tightening in monetary policy over the balance of the year. Mester made a strong argument for adhering to the plan for a steady rise in the funds rate and registered her discomfort towards a “wait-and-see” attitude: “I don’t subscribe to this, ‘Let’s just wait and see what happens and then raise interest rates.’ That’s not a good way of going about it. I’m very comfortable with this upward path.” She also highlighted the downside risks from waiting too long to remove accommodation: “The risk of moving too late poses some risk to the economy.” George’s views were broadly alike, with similar warnings on moving “too gradually.” Rosengren’s speech at a commercial real estate conference specifically pointed out the risks of an overheating economy. He pointed out that “while [he is] certainly not expecting such a scenario to occur, central bankers are charged with thinking about adverse risks to the economy.” At a different event, he stuck to his view that four rate hikes total this year was still “reasonable.” He also saw potential upside risk to the rate path from fiscal stimulus: “If we were to get a lot more stimulus, that would cause us probably to raise rates a little more quickly.”
Evans said that he had “a lot more confidence that [the fed funds path is] going to be upward sloping from here on out, according to our outlook.” He also warned of the necessity for a higher funds rate in case rate cuts are needed for a future downturn: “We really need to get inflation up to our 2 percent objective so we can have the 3 percent cushion to drop rates if we need it.” He revealed at a later event his hope that the tight labor market would raise inflation: “Maybe we will all of a sudden see Phillips Curve inflation contributions pick up a little bit more if we keep moving down.”
We are especially interested in whether the second consecutive weak CPI inflation report for April had made more centrist policymakers more cautious and leaning to a wait-and-see posture. That was not the case. Evans said he was “looking through” Friday morning’s disappointing CPI data: “My view has been I’m going to sort of look through that until I get a better reading as to whether or not its altered its trajectory…or if it’s just sort of a little pause.” He still saw three hikes in total this year. He was more concerned about the Q1 slowdown in growth:“The first quarter data was weaker than I would have hoped for certainly,” but he looked to Q2 to “make up for that.” Kaplan’s base case was still for three rate hikes in total this year, although he was “very cognizant” of recently muted inflation pressure. Nevertheless, he expected inflation at two percent “by the end of this year.” However, Bullard pointed to his estimate of r-star, even lower than Yellen’s likely-near-zero estimate for the “current” r-star, as an impetus for keeping the fed funds rate low in the near term: “The natural rate of interest, and hence the appropriate policy rate, is low and unlikely to change very much over the forecast horizon.” He therefore called for a gentler rise in the funds rate, and said: “What I object to is the idea you have to march up 200 basis points to get to a neutral rate.”
Policymakers were in broad agreement over announcing a change in reinvestment policy in the latter part of the year. Mester was “comfortable changing our reinvestment policy this year, with clear communication in advance about how we plan to implement the change. My preference is that once we decide on a plan, we stay with it.” George invoked the term “autopilot” to characterize such a plan, while Rosengren said the change in reinvestment policy should be “highly tapered.” A few policymakers, such as George and Dudley, saw the Fed as allowing both MBS and Treasuries to run off. Bullard did not see any adverse effects from a future decision to shrink the Fed’s balance sheet, noting that “the taper tantrum was a communications issue and not a problem of actual policy.” Rosengren gave a more exact timeframe, saying that the FOMC should consider a change in balance sheet policy after one more hike, which we see as being in June. On the other hand, Dudley appeared to favor a somewhat later start, with shrinkage to begin later this year or in 2018. Evans saw balance sheet normalization as taking “three to four years.”